Decomposition of the tar residue from oil distillation was carried out under hydrothermal conditions using a batch reactor at 623-673 K and 25-40 MPa, with and without K2CO3 as a catalyst. The reaction scheme for tar decomposition was determined as follows: the liquefaction and dissolution process of tar occur first and then intermediate chemical compounds are transformed into lighter molecular weight species. The presence of K2CO3 activates the dissociation of molecular hydrogen to facilitate hydrogenation reactions. The main products from the decomposition of tar were phenol, biphenyl, diphenylether (DPE), and diphenylmethane (DPM). These results indicate that hydrolysis was important in the cleavage of the macromolecular structure of tar under both catalytic and non-catalytic hydrothermal conditions. This method can be developed for efficient tar liquefaction to generate high yields of valuable chemicals in an environmentally friendly way.